Analytical Export Support Headquarters

22 august 2011 года
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Expert,
Moscow
22.08.2011 6:00:00
PHOTO ALEXEI MAISHEV
Author: ALEXANDR IVANTER

One of proponents of an emerging Export Credit and Investment Insurance Agency, Vnesheconombank Deputy Chairman Petr Fradkov views a new institution as a brain trust responsible for supporting Russian exporters and investors abroad.

-Petr Mikhailovich, what stage is the project to set up an export agency going through?

-The project to set up an export credit and investment insurance agency is now at a pretty advanced stage, it consists of two parts. The first stage is to prepare legislative framework for a particular type of insurance, that is, insurance of export credits and investments against business and political risks. This type of insurance has been nonexistent in our legislation so far. We had to introduce a great deal of amendments in applicable regulations and above all in banking legislation. All these amendments were included in a federal law that was published and came into force a month ago.

The second part of the project is comprised of corporate decisions that VEB takes as a one-hundred percent shareholder of the agency being set up.

-Why was a decision made to set up the said agency as VEB’s subsidiary?

-Originally, and this results from the Law “On the Bank for Development” VEB was to be responsible for insuring export credits. Although the practice showed that it was not possible for one and the same institution to be a creditor and an insurer at the same time. It was a very difficult process in terms of internal documents, reserves and balance sheet. So, a decision was made to delegate an export credit insurance function to VEB’s subsidiary in the form of an open joint stock company.

-Is the agency supposed to be a commercial entity?

-It is a commercial entity on a pro forma basis. But all profits to be generated by an agency are to be used to form a reserve fund for insurance transactions. Initially, such reserve fund is to be set up by VEB and then it is to be replenished through using the agency’s capitalized profits. In the case that these reserve funds are not sufficient the law stipulates that federal funds can be requested.

-How is the agency’s institutional structure going to be formed? Will some of VEB’s departments become a separate entity?

-No, they won’t. The more so, this company’s shareholder’s rights are to be exercised by VEB’s Supervisory Board rather by VEB, this means that this entity’s management has been raised to a higher level. And this was done intentionally to underline the agency’s state rather than commercial function. The agency’s core personnel consist of insurers who are working outside VEB.

-Are there such specialists in Russia?

-Yes, there are, but not many. These types of insurance were developing in embryo in two three largest private insurance companies. They tend to develop insurance of short-term (up to six months) trade credits inside Russia. There are almost no specialists dealing with insuring exports and political risks. The agency plans to insure both business and political risks. A list of all risks is to be clearly stated in a governmental resolution to be specially worked out and approved to build up on the law. The resolution is also to state requirements for the agency’s financial sustainability as well requirements for insurance rules and control to be exercised by the government directly.

-So, the Russian Insurance Supervision Agency’ functions will not be applicable to the agency?

-No, they won’t. This is a very serious exception from the law on insurance business. But this exception is justified and is in line with such insurance agencies’ international practice. In fact, the agency is not going to operate in a competitive insurance sector because it fills a niche where commercial insurance companies are not represented now.

-Why wasn’t possible it possible to perform an export support function through VEB’s subsidiary – Roseximbank?

-Roseximbank’s agent’s function is to extend sovereign guarantees on behalf of the Russian Finance Ministry to Russian exporters. This is somewhat a different instrument. Such an instrument is used when Russian exporters are obliged by a contract or law to extend a guarantee to its foreign purchaser, that its, Russian products to be sold will be delivered timely, construction will be completed timely and etc. As far as complicated and long-term contracts are concerned, this sort of guarantee is not easily available to our exporters of high technology products and services. Roseximbank’s special guarantee mechanism was established to support exports.

So, sovereign guarantees and insurance of exporters are two complementary instruments. In some countries the situation is similar to ours. For example, in Japan the Japan Bank for International Cooperation (JBIC) extends guarantees to exporters and Nippon Export and Investment Insurance deals with insuring exports.

-Will the Agency be able to insure a foreign purchaser of our products rather than a Russian exporter?

-The law on the agency provides for the opportunity to insure both the seller and purchaser as well as banks funding supplies on the part of the exporter and importer. Later on, we might deal with insuring investment, for example, when a Russian company builds an enterprise abroad. These risks are more complicated, in fact, the agency will monitor a project at all stages of its life cycle.

-Given an initial capitalization of 30 billion rubles, what will be an approximate amount of total insurance coverage?

-We made a preliminary estimate with specialists from the Russian Economic Development Ministry acting on a presumption that at the first stage the agency will be able to insure 15 percent of Russian mechanical engineering exports. As a result we expect a total amount of insurance coverage for the first three years of the agency’s operation to be no less than 10 billion dollars.

An important line of the agency’s activity not directly related to insurance is to set up a sort of credit bureau to accumulate basic data on Russian exporters’ credit histories. This, together with a constructive dialogue between foreign export credit agencies and our agency, would help to engage foreign export-import banks and export insurance agencies in cooperation with Russian counter agents.

-From what you said it follows that it is standard practice to exchange such data bases between countries?

-You are right, we are involved in an active exchange of information. Generally speaking, the agency is a serious brain trust and its customer service is not limited to insurance business alone. Both the customer and an insured project continue to be monitored constantly in order to forecast and if possible avoid an occurrence of insurance event. This differs a lot from a normal creditor-bank’s activity.

-Do you mean a remote control monitoring?

-No, I don’t. Under an agreement the agency’s representatives are to be in constant contact with their customer. They tend to interact actively with their country’s government authorities. These people have in-depth knowledge of their customer’s country of residence, specific industry and enterprise.

-Is the agency going to reinsure accepted risks abroad?

-Yes, it is. But the choice of reinsurers will be regulated. Specifically, these companies must have a rating not lower than the agency’s rating, that is, not lower than a sovereign one. One of our future Russian agency’s objectives is to receive a sovereign rating in the shortest term.

-When will the agency be able to start working?

-Three documents are required to launch a new institution. First, it’s a governmental resolution that specifies main requirements for the agency. Second, - rules of insurance, a main operational document, detailed procedures and regulations. And thirdly, - the agency’s strategy to set forth the agency’s operational financial parameters, its insurance capacities with regard to various countries and regions and etc. I hope that the agency will be able to start operating in early 2012.

Today, export credit agencies (ECAs) are operating in more than 80 countries. More than the 50 largest ECAs and insurance companies both private and state-run ones, involved in insuring and guaranteeing export transactions are united in the International Union of Credit & Investment Insurers also known as The Berne Union. The Union’s members account for 10 % of the world’s financial insurance and guarantee support.

A policy of export financial support is regulated by such authoritative international organizations as the OECD and the WTO. A special agreement on official export credits was worked out and is being successfully applied within the OECD. This document is a gentleman’s agreement and is not the OECD’s legislative measure. Its main objective is to regularize the export credit market and prevent dumping in the sector. The agreement regulates, in particular, minimum rates on insurance and funding of export credits. Adherence to OECD standards is recognized by WTO rules as not subsidizing exports.

The world’s functioning export insurance credit agencies can be subdivided into three groups in terms of a business model being applied.

An export insurance agency in the so called first traditional model operates directly by way of using the state’ budget and might be both a state-run entity, for example Eximbank (US), ECGD (Great Britain) and a private insurance company which is authorized to support national exports, for example, Euler Hermes (Germany), Coface (France),Atradius (The Netherlands) and others. ECAs operating on this model are responsible for supporting national component as part of export contracts.

Financial products offered in this case are highly standardized. This is above all export financing (a supplier and buyer credit, a documentary letter of credit) insurance of political risks, extending performance guarantees.

A high level of transactions’ standardization and the model’s insufficient flexibility make it almost impossible to diversify risks, customers, sectors and markets. Each transaction requires a high level of capital reservation and this in its turn might result in such activity’s reduced profitability.

ECAs’ operation on the basis of the second model (it is this model that Russia’s emerging agency is focusing on) is to provide support for national companies to implement their global development strategies as opposed to a concept of national component implemented as part of the first model.

The second model makes it possible to introduce innovations and new financial products, support national companies’ internationalization as well transactions classified as strategic ones from the point of view of the state. A range of financial products is notable for great flexibility and readily adapts to new programs such as untied financing in combination with direct lending.

And finally, the third highest type of ECAs operation when an export credit agency evolves into a global market player with a very wide range of services offered and in effect is a holding company consolidating various companies each of which specializes in a specific product, line of business (for example SACE in Italy). Under international practice ECAs do not give top priority to short-term business, it’s not their core activity. It is private insurers that are most active on this market. ECAs tend to expand their transactions on the marker for insuring short-term export credits in unfavorable economic situations as it was demonstrated by the recent financial crisis. Specifically, under a special resolution by the Euro Commission in May of 2008, ECAs were allowed to step up their activity on temporary basis on the market for insuring short-term export credits in a period of crisis for the most part to fully meet European exporters’ needs (largely small and medium-sized enterprises) for insuring their export credits.

On the basis of VEB’s materials

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Mikhail Poluboyarinov: Russia Must Become the World’s Transport Center

16 august 2011 года
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Industrial Weekly
15.08.2011

Air transportation market is inextricably linked to airport infrastructure modernization – a sector which does not generate great interest among private investors due to immensity of investments and long pay off periods of such projects. Vnesheconombank as a national development bank participates actively in upgrading this sector. In his interview to Industrial Weekly VEB Deputy Chairman Mikhail Poluboyarinov told about specifics of funding such projects, their current status and prospects.

Mikhail Igorevich, would you tell us about the Bank’s role in modernizing Russian airports? How many such projects does the Bank have?

- All over the world, airports and companies related to them have a significant influence on the economy and employment creating almost 1% of global GDP. Unfortunately, the current condition of Russian airports’ land air transport infrastructure facilities and their capacity are unsatisfactory and badly worn-out. They fail to meet economic and flight safety standards. Underdeveloped airport infrastructure hinders the development of air transportation services and realization of the country’s transit potential.

Russian airports are lagging behind in terms of service quality, related services, the level of business processes, flight frequency and regularity, service efficiency, the level of aviation technologies and interaction with airlines and logistics operators. Airport infrastructure fails to achieve objectives of accelerating the transit of goods and people, reducing transportation costs, increasing availability of services and competitiveness, realizing transport potential, increasing safety and sustainability of transport system, improving people’s mobility and increasing freight flows.

Russia’s airport sector is in great need of financing. By various experts’ estimates, up to 80% of air terminal infrastructure has to be modernized. At the same time, preconditions are not yet ripe in Russia for implementing projects in the airport infrastructure sector through using private investments alone. It’s very difficult to raise capital for development because investors can’t be fully confident that their investments are protected and they don’t risk participating in capital-intensive projects. So, it’s quite evident that without the state’s active involvement there is no chance to dynamically reconstruct, upgrade and develop airport infrastructure. That is why many projects, for example, Sheremetjevo-3 would have never been implemented without the state’s support including the state represented by Vnesheconombank.

VEB’s priorities as a bank for development are to remove economic growth infrastructure restrictions and develop the most important industrial sectors. One of the Bank’s lines of activity is to fund projects aimed at modernizing and reconstructing airports. Aviation transport projects, that is, projects that are directly or indirectly related to aviation (infrastructure of airports, aircraft construction and air transportation) account for about 15 % of the Bank’s total portfolio. And our investments are made in line with a definite strategy agreed upon with the government and line ministries.

VEB’s goal is to maximally help transform Russia into one of the largest global transport centers, increase qualitatively domestic passenger traffic and freight air transportation, establish effective mechanisms for interaction between the state and investors, hedge risks of private investors investing in transport infrastructure. It is for this reason a number of projects with Vnesheconombank’s participation are being implemented in several regions of the country. These projects are aimed at renovating airport infrastructure. Their total value is as much as 95 billion rubles and Vnesheconombank is to provide about half of the funds.

If we look at the map of airport projects, which have been completed, are being implemented at present or are only under consideration at the Bank, we can easily see that these are all hallmark places. Sheremetjevo-3 is Moscow and it speaks for itself. Pulkovo is Saint Petersburg, the second capital. Khrabrovo is Kaliningrad – the westernmost point of our country, an enclave. Yekaterinburg is factually the country’s geographical center. It will host the 2020 World Expo and perhaps group tournament of the 2018 Soccer World Cup. Vladivostok is our country’s far eastern outpost where the 2012 Asia-Pacific Economic Cooperation Summit is to take place. Sochi is not only Russia’s largest resort but also a place to host the 2014 Winter Olympic Games.

- On what terms does VEB extend credits?

- Although we have a mixed funding structure, almost any project is funded through using borrowed money. But as VEB is a state corporation, in fact, a large state bank with a country rating we have a chance to borrow at a cheaper rate on markets including international ones than other banking institutions and lend on more favorable terms than commercial banks.

I’d like to stress that even this is not the most important thing: you won’t get much if you just compare our interest rates with those of commercial banks, this comparison is not correct because we operate in quite different investment fields. It’s a lot more important that VEB lends to projects that commercial banks have no interest in as they are not ready to assume project risks and extend credit resources and for longer periods than commercial banks. At present, there are not many commercial banks in Russia capable of funding infrastructure projects with a horizon of 10-15 years. This is an objective reality. As far as our terms of credits are concerned, credit tenors vary from 7 to 15 years and interest rates depending on a project’s economics are a lot lower than market rates used to finance even the best Russian corporate borrowers.

It goes without saying that it is the government that makes a decision as to which project must be implemented, it’s not up to a bank to decide as to which airport is needed. But we are responsible for analyzing a project, we look at passenger flows, calculate cash flow, determine real needs and the amount of bank credits – otherwise funds would be irretrievably lost. Of course, it’s not only return on money that matters; the government is also guided by social needs. If necessary, it can somewhat subsidize a project but in any case expert examination has a sobering effect. An airport is always a growth point but the budget is not limitless and the government starts to determine as to what extent this growth point is important in this place. And our main goal as a consultant is to tell the truth to the government as to what can be done on the principles of recoverability and as to what should not be done. So, we concluded an agreement with the Ministry of Transport on investment consulting.

The abovementioned does not rule out the fact that we also take into account social aspects in our activity. Perhaps what I’ll say now will seem to run counter to what I’ve said before but despite the fact that we act on the principle of break-even condition when we make a decision on financing a project, our state institution status obliges us to take into account social factors although they are not determinant. Nevertheless, they are important and in each case we try to determine the number of jobs to be created as a result of implementing a project as well as its importance in terms of a region’s socio-economic policy. For example, upon considering the project to build a new terminal in Vladivostok we took into considerations not only its economic cost efficiency but also the fact that the city would host the 2012 Asia-Pacific Economic Cooperation Summit as well as the region’s economic development and ensuring transport availability to people. So, despite the project’s complicated economics we made a decision to finance the it.

In this respect, I would like to stress that it is crucially important for the Bank what cumulative effect a project is going to have. And it is safe to say that VEB acts as a catalyst of the whole process aimed at creating a new terminal in the course of which new related businesses are being developed, new jobs are being created for small and medium businessmen and various companies are being engaged in the project, for example, construction materials and equipment suppliers, service businesses and etc.

- What’s the current status of the most significant projects?

- As you know, terminal “D” in Sheremetjevo is already being operated. This is the first Russia’s transport interchange hub with a capacity of 12 million passengers per year. The project’s implementation made it possible to bring minimum connection time to the best global airport hubs’ standards halving passengers’ transit time. Main prospects for Sheremetjevo are to further increase the terminal’s capacity and build the third runway. The Ministry of Transport sets such a task. So, there is a need now to engage a managing company in the Sheremetjevo airport that would assume all investment obligations for the construction of a new large complex.

The Sochi airport was also put into operation. At some point, the Sochi project required to make significant technical changes and rehabilitate financial situation but later on the project was coming pretty well. The project’s distinguishing feature is that during the Sochi Olympics the airport is required to handle such peak capacities that will not be needed during its normal operation. By the way, I’d like to say that the Gelendzhik airport also draws the Bank’s attention because government insinuations regard it as a backup for the Sochi airport.

The Koltsovo international airport was funded by the Bank in the amount of 2.25 billion rubles and was put into operation by the SOC summit in 2009. We view the Koltsovo airport as a Russian hub where large passenger flows including transit ones are concentrated so we see favorable prospects for the project’s further development.

I’d like to single out the project aimed at building the Vladivostok airport’s international terminal. The airport is to service participants in the 2012 Asia-Pacific Economic Cooperation summit so the terminal must be put into operation till the third quarter end in 2011. But I’d like to say that the project’s main objective is to provide the Primorsky Territory with a top-quality, comfortable modern airport. The project’s total value is 5 billion 813 million rubles, with Vnesheconombank’s participation share being 2.3 billion rubles. The terminal is to be put into operation in a few months’ time. The terminal with a total area of about 50 thousand square meters and a capacity of 3.5 million passengers per year will be in line with international standards and requirements and will completely replace the current international and domestic flights service facilities.

Vladivostok is located near the countries of the Asia-Pacific region and these countries have shown high economic growth rate in the last years. The Vladivostok international airport is also favorably located between several main long haul routes from Northeast Asia to North America and in comparison with Moscow it is better placed for servicing flights from Russia’s central and eastern parts. Once the terminal’s construction has been completed, Vladivostok will be able to compete with the largest Asian transport hubs in Japan, China and South Korea. For the most part, profit is expected to be gained from transit. Airlines carrying passengers from one continent to another will find it easier and more profitable to refuel in the Russian airport.

As far as Pulkovo is concerned, the first stage of implementing the project has started there after the completion of preparatory work.

- Could you tell us in more detail about funding Pulkovo’s modernization since foreign investors showed great interest in the project?

- Pulkovo is a unique project. Here, for the first time in the history of projects to create airport infrastructure in Russia, international financial institutions have shown considerable interest. Such creditors as the EBRD together with the European Investment Bank are acting as leaders of foreign creditors pool including commercial banks, the Russian side is represented by VEB. Credit resources to fund the first stage of the project were made available in approximately equal parts by VEB in rubles and foreigners in foreign currency. Due to the scheme chosen we managed to substantially reduce foreign exchange risks. We are very optimistic about the project believing that it will become an exemplary one. It was not by accident that this transaction was declared The Best Deal of 2010 in the airport infrastructure development by the British Journal Project Finance.

- Mikhail Igorevich, what new projects are you planning to participate in? Is the Bank going to be as active in the future as it has been before?

- As to our plans for the future, we are now holding talks on our possible participation in the reconstruction of the airports in Nizhny Novgorod and Samara (Kurumoch). We have also received other requests, so there will be a lot of work to do for a long time.

Projects with Vnesheconombank’s participation:

1. Pulkovo
Reconstruction and operation of the Pulkovo International Airport (the first stage).
The project’s total financing amount is 1.2 billion euros. The Bank’s participation share is 10 billion rubles.
Initiator: LLC The Air Gates of the Northern Capital.

The project’s advantages:
International safety and technical standards.
Capacity: up to 14 million passengers per year.

 

2. The Sochi Airport
Completing the construction of the air terminal complex in Sochi.
The project’s total financing amount is 8.17 billion rubles.
The Bank’s participation share is 7.3 billion rubles.
Initiator: LLC Basel Aero.

The project’s advantages:
Servicing the 2014 Sochi Winter Olympic Games.
Increasing the terminal’s capacity to 2500 passengers per hour.

 

3. The Koltsovo Airport
The Koltsovo Airport Development.
The project’s total financing amount is 3.37 billion rubles.
The Bank’s participation share is 2.25 billion rubles.
Initiator: OJSC The Koltsovo Airport

The project’s advantages:
Increasing the international terminal’s capacity to 4000 passengers per hour.
The project is in line with Russia’s transport strategy up to the year 2030.
The project was put into operation by the time of the Shanghai Cooperation Organization Summit.

 

4. The Vladivostok Airport
Construction of a new passenger terminal in the Vladivostok International Airport.
The project’s total financing amount is $0.19 billion
The Bank’s participation share is 2.32 billion rubles.
Initriator: OJSC The Sheremetjevo International Airport 

The project’s advantages:
Increasing capacity and air transportation availability to the public.
Creating favorable conditions for participants in the 2012 APEC summit.

 

5. Sheremetjevo-3
Construction of the Sheremetjevo-3 (D) air terminal complex.
The project’s total financing amount is $1.1 billion.
The Bank’s participation share is $900 million.
Initiator: OJSC Terminal

The project’s advantages:
Russia’s first transport interchange hub with a capacity of 12 million passengers per year.
Bringing minimum connection time to the world’s best airports statndards.

 

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